Back to target – Nordea

Headline inflation rose more-than-expected to the ECB’s inflation target at 2.0% in October. Core inflation and core services inflation remained unchanged, while the unemployment rate was revised to a record low at 6.3%, Nordea’s economists Anders Svendsen and Tuuli Koivu note.

Most ECB speakers argue inflation victory within sight

“The ECB had clearly stated that inflation was expected to rise towards year-end due to base effects, yet markets reacted to higher inflation in Germany and Spain yesterday. Because what matters most to the ECB, we think, is the seasonally-adjusted momentum in core services prices, and those were also the ones that increased in yesterday’s German release.”

“When we’re still not too worried, it is because those increases were likely temporary, driven by two specific categories, and because of the news from the German car industry about factory closures, adding weakness to the labour markets going forward and lowering the risk to too high wage growth. Most ECB speakers including President Lagarde have argued that inflation victory is within sight.”

If the ECB is to cut rates by 50bp it will most likely be because of uncertainty over the growth and the labour markets rather than too low inflation. Today’s release of the uneployment rate was revised to a record-low at 6.3%! It still looks like the ECB will have a big downward revision to its inflation projection to do at it’s December meeting, which will keep markets speculating about a 25 or 50bp rate cut.”